Inflation pressures in the UK are anticipated to ease slightly despite a large rise in April. Headline annual inflation for May is estimated to fall to 3.4% from 3.5% in April, while core annual inflation is expected to decrease to 3.5% from 3.8%.
April witnessed an unexpected surge in services inflation, which might be reversed in May. An error in the data provided by the Department for Transport, particularly affecting vehicle excise duty, will be corrected in the May report according to the ONS. Additionally, high airfares in April coincided with the Easter holiday, a situation not repeated in 2024 as Easter fell in late March.
Price Pressures And Boe Action
Despite the anticipated drop, price pressures remain a concern for the BOE. With inflation over 3% and the retail prices index above 4%, consumers feel the impact of rising costs. The BOE’s objective to return inflation to 2% requires further action.
The forthcoming inflation report is unlikely to alter expectations for BOE meetings. Current estimates show an 88% probability of maintaining the bank rate, with future cuts anticipated, including a potential 25 bps decrease around September and a total of 50 bps cuts by year-end.
While May’s figures are expected to reveal some cooling in headline and core inflation, the overall path towards the Bank’s target is still far from complete. That said, the anticipated downward pressure in this month’s data arises less from broad disinflation and more from technical corrections and one-off events last month that temporarily inflated prices. For instance, that spike in services inflation during April—largely driven by travel costs and a misclassification error—will likely unwind, which should help lower the month-on-month rate.
The Office for National Statistics has already clarified that the previous overshoot was tied to inaccuracies in recording vehicle-related duties. These are now due to be adjusted, lending additional weight to forecasts of a moderate pullback. So we are working with a short-term rebalancing rather than a dramatic shift in economic momentum. The difference is meaningful.
Mann and the rest of the committee continue to highlight that domestic price pressures, particularly in services, remain too elevated to warrant any swift change in tone. They’re watching wage growth, sticky shelter costs, and supply persistence—all of which filter into core readings over time. While the headline number may soften modestly, it must be read in context: one data point, even two, will not reset the policy trajectory.
Expectations And Market Reactions
From where we stand, expectations for the next few MPC gatherings remain steady. Markets have largely priced out a summer rate cut, with September emerging as a likelier window for a modest reduction. No one seems to be bracing for a dramatic policy pivot, and the implied forward curve remains cautious but stable.
For shorter-dated derivatives, there’s little reason to chase aggressive positions against the current policy path. Volatility across rates has tightened, and unless surprise wage data or unexpected global shocks arrive, the front-end likely remains range-bound. Further out on the curve, slight steepening is plausible as muted inflation data edges the bank marginally closer to its medium-term goals.
Price action has already leaned into the dovish shift since earlier in the year. The room for repricing has narrowed, particularly across one-year contracts. We’ve noticed that any miss to the upside in inflation figures tends to trigger sharper reaction than equivalent dovish surprises, reflecting continued sensitivity to upside inflation risks.
What warrants attention now is not the headline drop itself, but how this plays into broader rate expectations in the second half. September is still in play, especially if core metrics step down in tandem with headline inflation in the upcoming readings. A true downward trend would support the consultancy that some policymakers are waiting for before changing tack.
In the weeks ahead, any positioning should lean into the incremental rather than the sweeping. Data-dependence remains high. We’re now into a stretch where modest economic shifts will exert outsized influence on pricing models. Be aware of that asymmetry; tails are thin in either direction, but reaction function remains alert to persistence.
As for implied rate vol, it’s becoming a less rewarding strategy to position around policy divergence in the very short term, given the BOE’s clarity about its wait-and-see approach. Cross-market trades anchored on major central bank divergence could see improved traction, especially if ECB easing proceeds this summer while others stay put. This remains worth monitoring.
